RMG SPEAKS Finders Keepers, Losers Weepers; and Broker-Dealers.

What’s the number one thing start-ups need? No one would argue that capital is the top answer.

And who raises capital for start-up businesses? Ordinary people like you and me? Not so fast.

The ugly truth that only securities lawyers, regulators and others in the know will tell you is that the only people or entities who can legally raise capital for businesses on a recurring basis (indeed more than once …… maybe just once) are properly licensed securities brokers. There may be thousands of so-called “finders” – companies that make capital introductions and receive compensation on a transaction basis – who operate in well appointed offices all over the place. Lawyers (and the Securities and Exchange Commission) will admit that many of these finders are breaking the law by acting as brokers (as defined by securities laws) who receive commissions without being licensed.

The Securities Act of 1934 is the statute by which broker-dealers are required to be licensed. Requiring brokers to be licensed is a good idea. Those selling securities are entrusted with the confidence of their clients in an industry where fraud and misdoings run ramped. Widows and orphans need protection ……. we all could use some protection from unscrupulous stock sellers.

However, not all activities that fall within the definition of securities brokering are created equally. Many start-ups are issuing stock, convertible debt, and other securities to so-called accredited investors, who are deemed to be sophisticated enough to protect themselves. Nonetheless, organizations (including RMG) need to address issues of broker licensing before getting paid for raising capital in the market for our clients. Those activities may or may not be the activities of a broker who is subject to Federal and state securities laws.

RMG has recently signed an affiliation agreement with Midtown Partners, a licensed broker-dealer. This agreement will allow RMG to receive transaction based commissions without violating laws. We are taking our Series 7, 63 and other exams to be securities brokers. It’s hard work, but its what we have to do to do what we do. We’re fortunate to be able to have an affiliation with such a quality group as Midtown.

Unfortunately, the point is that the rules related to broker-dealer registration need to be re-evaluated in light of so-called finders raising capital from accredited investors in a private placement of securities. Many securities practitioners agree.

We like taking exams like a Series 7 at RMG. That’s sport for us. But honestly; don’t we need to revisit broker-dealer rules in light of the realities of capital markets for start ups?

Our Money Isn’t Friendly (or Unfriendly for That Matter)

Non-profit and governmental entities that provide capital for economic development do so for various reasons: improving the economic position of a blighted community; creating great jobs for the underemployed and unemployed; providing risk capital to community-strategic businesses when market forces will not do so. Those are valid examples of why economic development dollars flow in a certain direction.

Those dollars get put to work in many different structures. Program related investments are one example; grants, of course, are a more traditional example. No matter how the dollars get invested, one common mandate is essential to taking economic development capital: outcomes must be defined and the organizations receiving the capital must be accountable for those outcomes.

Those benefactors providing capital to RMG insist that we produce outcomes such as meaningful job creation, the growing of difficult businesses in blighted areas and the leveraging of our region’s lush resources for the betterment of our communities. When we give our time, services and money to entities, we expect them to be accountable as well to the outcomes we define.

That’s why I was dumbfounded to learn recently that a director who sits on the board of one of our portfolio companies believed it was appropriate to have that company take certain actions that would not lead to the desired outcomes we had agreed to, and instead wanted to “shelf the project” until the equity owners could more easily exploit their position. This director’s argument to put the company in hibernation was that the non-profits and government entities who funded the company were “friendly money.” What he meant, I suppose, was that the funding sources would simply chalk up losses rather than exercise their rights to take the company in a different direction to try to achieve the desired outcomes.

Economic development capital is neither friendly nor unfriendly. It is a means to achieve an outcome. If those who are lucky enough to receive the capital do not achieve the outcome, the capital providers then must ask why. If the reason why the outcome failed was because of poor decisions of equity holders or ill-informed directors, the capital providers will (and should) exercise rights, which may include removing misguided stakeholders, and pushing on for the desired outcome.

“Non-profit” does not equal schmuck. We choose the companies we work with based on an assessment of the quality of the people involved and the commonality of vision and desired result we together fight to achieve. Sometimes we make mistakes in judgment about the people we work with. When those people take our money and services, and make decisions that are inconsistent with agreed to outcomes, we will make an assessment of the best course of action. “Friendly” is not one of the criteria we consider when making that assessment.

Steve Adelkoff is the President of Renewable Manufacturing Gateway

Welcome to “RMG Speaks,” Renewable Manufacturing Gateway’s Blog

Renewable Manufacturing Gateway (RMG) is a non-profit organization devoted to economic and job growth in the renewable energy and clean tech (RECT) space in the Tri-State area encompassing Western Pennsylvania, Eastern Ohio and Northern West Virginia. We meet our mission goals by providing strategic advice to companies, both start-up and mature, engaged in RECT industries. This advice includes capital markets strategies and introductions, commercialization of products, technology transfers and advancements, financial modeling and reporting, marketing efforts, governance and investor relations, transaction structuring, acquisition and strategic alliance consulting, and valuation strategies.

We bring a unique skill set to the table that is part venture capital, part private equity, part merchant bank and all heart and soul for our clients and our region. A visit to our website (www.renewmfg.org) will lead you to a description of our personnel, who include:

- The former head of strategic development and M&A for a NYSE utility company;
- The former head of international development for one of the largest construction concerns in the Pittsburgh region;
- A former equity partner of one of the world’s largest law firms, who later became the CFO of a publicly traded investment bank specializing in Shariah compliant alternative investments;
- A survivor of a decade on Wall Street (including a stint at Lehman Brothers) who was involved in financing over $10 billion for independent power producers worldwide;
- The former head of cash management for an NYSE technology company; and
- A richly diverse group that includes individuals who grew up as global citizens in places such as Latvia and Qatar.

Not to belabor the point, but in our office, we have people who are fluent in no less than ten different languages. Those people will be contributing to this forum – and I promise they will do so in English.

Fulfilling our mission means constantly analyzing trends and developing insights about all aspects of the RECT space. That means challenging ourselves to make sense of the global and domestic macro and micro trends for commodities, conventional and renewable energy, technologies, capital markets, economies, demographics, geopolitical landscapes and best practices in business. That also requires us to make big calls on where RECT is heading in the short, medium and long terms, so our region can be at the forefront of innovation and sustainable success.

On a regular basis, we will offer those insights in this forum. We hope our offerings are at once provocative and entertaining. We seek to provide the unexpected and exploit the unanticipated. We will go further in our goals by digesting your feedback on our musings. Indeed, we look forward to reading your musings. So, please don’t be bashful about giving us your insights.

As the commercial says, “Life comes at you fast.” The RECT space moves as fast as lightening. Please join us for the ride.

Steven Adelkoff, President of Renewable Manufacturing Gateway
http://www.renewmfg.org